Issues with 401k Rollovers

You're approaching your retirement or are already there. What should you do with all of individual contributions you and your employer have made for your 401(k) accounts? Should you perform 401k rollovers into IRAs?

You essentially have a pair of options. You can keep your accounts with your ex-employer plans. However, think about the positive implications of 401k rollovers.

Under an individual retirement arrangement, you are able to invest your proceeds in a number of investments. This puts you in charge of your investment. However, money that is drawn from the IRA is taxed at regular rates which may be up to 35% and will never be within the lower capital gains rates. And you'll pay one more 10% IRA penalty to take early distributions prior to turning 59½, unless of course you are eligible for an exception.

You can opt for 401k rollovers and then, should you need funds from the IRA rollover, qualify for a penalty exception if under age 59 1/2 or use rule 72t.

However, there is one other way which might be beneficial to your situation. It uses the above two options, however with the tax advantage for those who have a lot of your company's stock inside your 401k rollovers together with other contributions. If you do, you can make the most of paying the reduced capital gains rate on the net unrealized appreciation (NUA) of this stock.

To achieve this, you have to split the 401k rollover right into a company stock component and everything else. Now consider the 'everything else' part and do your own 401k rollovers. Have your ex-employer transfer those funds straight to the IRA - and never to you first. There is a very expensive and annoying tax complication if the employers send the funds to you, so make sure the company performs a direct rollover to your IRA custodian.

The part of the 401(k) that is all company stock, you will be able to get it all in a one time payment within that tax year. The amount that was originally invested in shares, you must shell out the regular tax amount. Yet later, you must pay the levy on the unrealized appreciation, but it will be at the capital gains charge (presently 15% federal).